Put Half Your Portfolio In Emerging Markets

Ashmore Investment Management's research head Jerome Booth says both institutional and retail investors need to significantly increase their exposure to the emerging markets to take advantage of those countries' growth.

</p> <p><b>Steve Forbes:</b> So how should an individual approach emerging markets? Right now the allocation is miniscule. How, if you're a wise investor, what portion would you put in?</p> <p><b>Jerome Booth:</b> Well, a wise investor or me personally, I'd put a lot in. But I think one idea worth looking at is GDP waiting. What investors really want is future income.</p> <p><b>Forbes:</b> Right.</p> <p><b>Booth:</b> And cap weight, which is what indexes are, is a very poor measure of that. It's got all the white elephants, all the wasted amount of money plus a lot of speculation between then and now. Past income is a much better measure of that. And we have a global measure of past income. It's called GDP. But that I think is the way to think about it. So if you think about GDP, emerging markets are on purchasing power parity 50% of global GDP today. So for market price, you look at market price, it's maybe 35%. So if you're investing short term, 35% would seem to be something you can at least shoot at as a target.</p> <p>If you're a pension fund and your liability structure is 15 years, it should probably be 50%. And I'm saying this is maybe, don't fall of your chair just yet, I'm saying pension funds should put 50% into emerging markets if they're neutral, not if they're bullish. Now I don't expect them to do that. But there are some at 30%. And the way they do that of course is that you do it by stealth. You don't necessarily tell your board you want to do 30% in the emerging markets. You say, "Oh, this private equity bucket we've got here, private equity based on leverage, don't like that idea anymore. That's not coming back, so let's put it in emerging markets." And likewise with real estate. And likewise with public equity and with timber or whatever asset class you have. And then you build up a portfolio. I think for individuals you also have to, and institutions, you also have to think about scenarios. You have to think about what could go seriously wrong.</p> <p><a href="http://itunes.apple.com/WebObjects/MZStore.woa/wa/browserRedirect?url=itms%253A%252F%252Fitunes.apple.com%252FWebObjects%252FMZStore.woa%252Fwa%252FviewPodcast%253Fid%253D350784219">Download The Intelligent Investing Podcast Here.</a> </p> <p><a href="http://twitter.com/forbesintellect">Follow Intelligent Investing On Twitter.</a> </p>